Saturday, August 2, 2014

FYI: 6th Cir Holds ECOA Violation May Be Raised As Aff Def in Recoupment, Allows Guarantors to Sue Under ECOA

The U.S. Court of Appeals for the Sixth Circuit recently held that an alleged violation of the federal Equal Credit Opportunity Act may be asserted as an affirmative defense of recoupment. In so ruling, the Court also held that the broader definition of “applicant” under Regulation B allows a guarantor to sue under ECOA’s spouse-guarantor rule.

A borrower refinanced various loans with a lender, with both the borrower and his spouse ("spouse") executing a personal guaranty. When the related note became due, the lender's successor filed suit, alleging among other things breach of the guarantee by the spouse. The spouse moved for summary judgment in her favor, arguing that the guarantee was unenforceable because it allegedly violated the federal Equal Credit Opportunity Act and Regulation B, 12 C.F.R. Sec. 202.7(d), 12 C.F.R. Sec. 1002.7(d).

The lower court disagreed, and found in favor of the plaintiff. The spouse appealed.

As you may recall, Regulation B prohibits a creditor from requiring an applicant's spouse to guarantee a credit instrument, even if the creditor requires someone to execute a guaranty. See id. Only applicants have standing to sue for ECOA violations. 15 U.S.C. Sec. 1691(e). However, "applicant" is defined differently in the ECOA and Regulation B: the former does not explicitly include guarantors, while the latter allows guarantors to sue for violations of the spouse-guarantor rule. See id.; 12 C.F.R. Sec. 202.2(e), 12 C.F.R. Sec. 1002.2(e).

On appeal, the Sixth Circuit first considered whether Regulation B's definition of "applicant" was entitled to deference. The Court answered this question in the affirmative. It began by reciting the familiar rule that where Congress was silent or a statute is ambiguous as to an issue at hand, an agency's implementing regulation will be granted deference where the agency's answer is based on a permissible construction of the statute. See Chevron, U.S.A. Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984).

The Sixth Circuit then scrutinized the ECOA, noting that it defines "applicant" as "any person who applies to a creditor directly for an extension, renewal, or continuation of credit..." 15 U.S.C. Sec. 1691a(b). Further, "credit" is defined as "the right granted by a creditor to a debtor to defer payment of debt..." 15 U.S.C. Sec. 1691a(d).

The Sixth Circuit reached that conclusion because it read the above definitions to provide that, although it is an "applicant" who requests credit, it is a "debtor" who reaps the benefit - such that "the applicant and the debtor are not always the same person." The Court therefore reasoned that if the applicant and the debtor are not always the same person, "it would be reasonable to conclude that the applicant could be a third party, such as a guarantor."

The Court therefore determined that the ECOA's definition of "applicant" is ambiguous, because it "could be read to include third parties who do not initiate an application for credit..."

Due to that ambiguity, the Sixth Circuit held that Regulation B's definition of "applicant" was valid, and that a guarantor can seek relief for violations of the spouse-guarantor rule.

Next, the Court turned to the question of whether a spouse-guarantor can assert an affirmative defense of recoupment. The Sixth Circuit again answered in the affirmative, noting that "[w]e see no command in ECOA or Regulation B to deny defendants the ability to assert a violation as a recoupment defense." The Court further observed that prohibiting a recoupment defense could undermine Congressional intent to "eradicate gender and marital status based credit discrimination."

Accordingly, the Sixth Circuit reversed the lower court's conclusion that the spouse cannot raise an affirmative defense of recoupment, vacated the lower court’s ruling granting summary judgment to the lender's successor, and remanded the matter for further proceedings consistent with its opinion.

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Ralph Wutscher's practice focuses primarily on representing depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, distressed asset buyers and sellers, loss mitigation companies, automobile and other personal property secured lenders and finance companies, credit card and other unsecured lenders, and other consumer financial services providers. He represents the consumer lending industry as a litigator, and as regulatory compliance counsel.

Ralph has substantial experience in defending private consumer finance lawsuits, including cases ranging from large interstate putative class actions to localized single-asset cases, as well as in responding to regulatory investigations and other governmental proceedings. His litigation successes include not only victories at the trial court level, but also on appeal, and in various jurisdictions. He has successfully defended numerous putative class actions asserting violations of a wide range of federal and state consumer protection statutes. He is frequently consulted to assist other law firms in developing or improving litigation strategies in cases filed around the country.

Ralph also has substantial experience in counseling clients regarding their compliance with federal laws, and with state and local laws primarily of the Midwestern United States. For example, he regularly provides assistance in connection with portfolio or program audits, consumer lending disclosure issues, the design and implementation of marketing and advertising campaigns, licensing and reporting issues, compliance with usury laws and other limitations on pricing, compliance with state and local “predatory lending” laws, drafting or obtaining opinion letters on a single- or multi-state basis, interstate branching and loan production office licensing, evaluations and modifications of new or existing products and procedures, debt collection and servicing practices, proper methods of responding to consumer inquiries and furnishing consumer information, as well as proposed or existing arrangements with settlement service providers and other vendors, and the implementation of procedural or other operational changes following developments in the law.

Ralph is a member of the Governing Committee of the Conference on Consumer Finance Law. He is also the immediate past Chair of the Preemption and Federalism Subcommittee for the ABA's Consumer Financial Services Committee. He served on the Law Committee for the former National Home Equity Mortgage Association, and completed two terms as Co-Chair of the Consumer Credit Committee of the Chicago Bar Association.

Ralph received his Juris Doctor from the University of Illinois College of Law, and his undergraduate degree from the University of California at Los Angeles (UCLA). He is a member of the national Mortgage Bankers Association, the American Bankers Association, the Conference on Consumer Finance Law, DBA International, the ACA International Members Attorney Program, as well as the American and Chicago Bar Associations.

Ralph is admitted to practice in Illinois, as well as in the United States Court of Appeals for the Seventh Circuit, the United States District Courts for the Northern and Southern Districts of Illinois, and the United States District Court for the Eastern District of Wisconsin, and has been admitted pro hac vice in various jurisdictions around the country.